Up or down?

Mon, 2012-07-09 09:15

The sudden negative turn of so many economic indicators at once – sluggish U.S. gross domestic product (GDP) growth, a labor market stuck in neutral, slumping consumer confidence, and now even the potential for a Norwegian petroleum industry strikethat could lead to significantly higher global oil prices – is enough to rattle any seasoned trucker these days, no matter how inured to volatility one’s become over the last few years.

Yet the question remains: do such negative metrics necessarily signal trouble for the freight markets? Surprisingly, the answer may be largely “No” as the reluctance by truckers large and small to expand their fleets means capacity remains tight – often tight enough to ensure that even if freight volume drops off, truckers should still be in a position to command decent (read as “profitable”) rates to haul what’s available.

That’s increasingly looking like a very smart move, by the by, as the U.S. economy overall is slowing down considerably. For example, the Bureau of Economic Analysisrecently noted that it’s third “revision” of real GDP growth statistics for the first quarter this year still indicates the U.S. economy decelerated to a real GDP growth rate of 1.9%, compared to 3% for the fourth quarter last year.

Then there’s the jobs picture, with nonfarm payroll employmentonly edging up a measly 80,000 in June, according to the U.S. Bureau of Labor Statistics, with the number of unemployed persons(12.7 million) essentially unchanged , meaning the unemployment rateheld at 8.2%. The agency added that the number of long-term unemployed (those jobless for 27 weeks and over) also remained essentially unchanged at 5.4 million last month – a group that accounts for 41.9% of the unemployed.

Jobs creation is an important metric for trucking to watch as it’s a good bellwether for how the U.S. economy is performing – something Eric Starks (at left), president of FTR Associates, noted in a story a few months back, albeit when the job numbers were a whole lot better.

Then there’s the decline consumer confidence tracked by the Conference Board via its Consumer Confidence Index (CCI), which doesn’t bring any good tidings, either. The CCI, which declined in May to a reading of 64.4, fell further in June to 62, the group said.

“Consumer Confidence declined in June, the fourth consecutive moderate decline,” noted Lynn Franco, director of economic indicators at The Conference Board. “Consumers were somewhat more positive about current conditions, but slightly more pessimistic about the short-term outlook. Income expectations, which had improved last month, declined in June. If this trend continues, spending may be restrained in the short-term.”

Of course, that “spending” is critical as it makes up two-thirds of what drives the U.S. economy – spending that translates into demand for everything from cars to dishwashers and toilet paper.

That concern is partially reflected in a worrisome data point charted by the Institute for Supply Management(ISM) in its most recent Manufacturing Business Survey: economic activity in the manufacturing sector, as tracked by the group’s “PMI” metric, contracted in June for the first time since July 2009.

“The PMI registered 49.7% in June; a decrease of 3.8 percentage points from May’s reading of 53.5%, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2%,” noted Bradley Holcomb (at right), ISM’s chair for its manufacturing business survey committee – though he was quick to add that the data also indicated that the U.S. economy overall grew for the 37th consecutive month in June.

Holcomb also said the firm’s New Orders Index dropped 12.3 percentage points in June, registering 47.8% and indicating contraction in new orders for the first time since April 2009, when the New Orders Index registered 46.8%.

Numbers like those are making CEOs across a range of industries very nervous – and that’s reflected in another survey by the Conference Board, dubbed the “Measure of CEO Confidence.”

The Conference Board’s Franco noted that while CEO confidence improved in the first quarter of this year, it decreased in the second quarter – dropping 16 points to 47 from 63 in the first quarter. She added that a reading of more than 50 points reflects more positive than negative responses, so you can see how quickly the outlook has flipped up in the corporate suite.

“CEOs began the year quite upbeat, but the lackluster performance of the economy so far, and expectations of more of the same, have clearly impacted attitudes,” Franco (at left) pointed out. “On a positive note, CEOs remain confident profits will continue to increase, driven primarily by market/demand growth.”

That being said, though, CEO assessment of current economic conditions has turned considerably negative, she said, with only 17% claiming conditions improved compared to six months ago, down significantly from 67% last quarter. A more negative attitude was also expressed regarding their appraisal of their own industries: now just 22% of business leaders say conditions have improved, compared with 42% in the first quarter of this year.

CEO optimism about the short-term outlook has also declined from last quarter, according to the Conference Board’s survey, as currently only 20% of business leaders expect economic conditions to improve over the next six months, down from 59% in the first quarter. Expectations for their own industries have also turned pessimistic, with just 25% of CEOs anticipating an improvement in conditions in the months ahead, down from approximately 44% last quarter, said Franco.

OK – so how does freight fare in this increasingly gloomier outlook? Well, not too bad, at least according to data tracked Wall Street investment firm Robert W. Baird & Co.

Benjamin J. Hartford (at right), one of the firm’s transportation analysts, noted in the firm’s latest Freight Flows brief a week or so back that despite what he calls “this tepid demand environment” truck capacity remains tight as fleet growth continues to be constrained by an ongoing shortage of qualified drivers and more expensive equipment, which is influencing capital deployment decisions.

And though overall economic activity is weakening, freight is still flowing. According to Baird’s Domestic Freight Index, freight activity grew 4% in May compared to 4% April and 4% overall for the first quarter this year – creating an environment of “modest freight growth” that should support decent rates.

He added that, absent a demand catalyst or worsening of the economic environment, TL rate increases should maintain the range of 2% to 4% for the balance of 2012, stressing that this pricing growth is supported by the “constrained capacity dynamic” noted above.

Happily, LTL rates are projected to do even better, climbing between 4% and 5% and thus outpacing TL rates in this tight-capacity market. “Current supply/demand dynamics are tight, but the lack of freight demand has kept rates in a relatively moderate growth range,” Hartford stressed. “Shippers are aware of capacity tightness and driver supply issues, supporting rate growth as shippers seek to secure capacity, allowing them to maintain lean inventory levels.”

There you have it. While the U.S. economy in general continues on its sluggish and uneven path, truckers should still be able to do well as decent freight volumes combined with tight capacity will keep the rate-setting ball in their half of the court for the near term at least.